The state government has justified the hike in the floor rate of value added tax (VAT) from 4 per cent to 5 per cent. It said the hike was made on the advise of the Centre and to avoid a loss of Rs 2,000 crore annually to the state exchequer.

According to an official communique on Thursday, the Centre has been compensating the states for the loss of revenue on account of reduction in the rate of Central Sales Tax (CST) from 4 per cent to 2 per cent. However, in order to reduce its burden, the Union government has been advising the states to raise the floor rate of VAT from 4 to 5 per cent.

Following this, 11 states including Tamil Nadu, Karnataka, Maharashtra, Gujarat, Orissa, Madhya Pradesh, Uttar Pradesh, Rajasthan and Karnataka have raised the rates from 4 to 5 per cent. Andhra Pradesh, however, did not increase the floor rate.Recently, the Centre had informed the state government that the compensation payable towards reduction in CST would be reduced by the amount of revenue that could be gained by raising VAT from 4 to 5 per cent, even if the state had not raised this rate.

During 2010-11, the deduction made by the Centre on this account had been Rs 1,089 crore. In addition, the state government had lost an equal amount due to non-increase of the floor rate of VAT. So, effectively Andhra Pradesh has been losing over Rs 2,000 crore every year by not raising the floor rate of VAT, the release pointed out.

On the other hand, the Federation of Indian Chambers of Commerce and Industry (Ficci) state council chairperson Sangita Reddy said the rate hike would add to inflation and urged the government to remove the new VAT structure on essential commodities, food grains and medicines.